U.S. Productivity Increases 2.2%, Labor Costs Cool

By Shobhana Chandra

Aug. 8 (Bloomberg) -- Worker productivity in the U.S. grew in the second quarter as employers cut jobs to weather the jump in raw-material expenses.

Efficiency, a measure of how much an employee produces for each hour of work, rose at a 2.2 percent annual rate, less than forecast, after a 2.6 percent gain in the prior quarter, the Labor Department said today in Washington. Labor costs climbed at a 1.3 percent pace, less than anticipated.

Employers eliminated 165,000 jobs from April through June to shore up profits, and still managed to get more output with fewer workers. Gains in productivity help lower inflation and bolster the Federal Reserve's forecast that prices will moderate.

``Productivity still looks pretty good,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. ``It's encouraging on the inflation front. We are seeing good cost control from businesses. It's good news for the Fed.''

Treasuries fell in the minutes following the report before turning higher. The yield on the benchmark 10-year note was 3.90 percent at 9:45 a.m. in New York, compared with 3.93 percent late yesterday.

Compared with the second quarter of last year, productivity rose 2.8 percent.

`Impressive' Resilience

``Historically, productivity growth has tended to suffer during periods of energy-price shocks,'' David Greenlaw, chief U.S. fixed-income economist at Morgan Stanley in New York, said in a note to clients. ``The current year-over-year growth rate of just a shade under 3 percent demonstrates an impressive degree of resilience.''

Economists had forecast a 2.5 percent rate of increase in second-quarter productivity, according to the median of 67 forecasts in a Bloomberg News survey. Estimates ranged from gains of 0.7 percent to 3.6 percent.

Unit labor costs, which are adjusted for efficiency gains, were projected to rise at a 1.4 percent pace, according to the survey median.

This is the Labor Department's preliminary report on efficiency. Final figures will be released on Sept. 4.

Labor's revised figures for the prior three years showed productivity rose an average 1.4 percent from 2005 to 2007, down from a previously estimated 1.6 percent. Commerce Department growth revisions issued on July 31 had showed the economy expanded less than previously estimated since 2005.

Today's report may ease concern that the productivity surge that began in 1996 was waning. Efficiency rose an average 2.9 percent in the nine years ended in 2004.

Hours worked dropped at a 0.5 percent pace in the second quarter, the fourth consecutive decline. Output increased at a 1.7 percent rate.

Hourly Compensation

Compensation for each hour worked climbed at a 3.6 percent annual rate after a 5.2 percent gain in the prior quarter.

Among manufacturers, productivity dropped at a 1.4 percent pace, the biggest decline since the last three months of 2003.

Employers remained focused on maintaining productivity at the start of the second half of the year. Payrolls fell in July for a seventh straight month and the number of hours worked dropped. Americans labored an average 33 hours and 36 minutes per week, six minutes less than in June and matching the shortest workweek since records began in 1964, government figures showed.

YRC Worldwide Inc., the biggest U.S. trucking company by sales, reported a second-quarter profit that ended two quarters of losses as it shut terminals, cut jobs and changed management at some regional brands.

Focus on Efficiency

``Our actions to improve operational efficiency, get our regional companies back on track and reduce overhead costs have been effective,'' Chief Executive Officer Bill Zollars said in a statement on July 24. ``Further operational improvements'' are planned for this quarter.

In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

The risks of softening growth and rising inflation led central bankers to keep the benchmark rate unchanged at 2 percent this week.

``Although downside risks to growth remain, the upside risks to inflation are also of significant concern,'' Fed officials said Aug. 5 in a statement. ``The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.''

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net